SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-17846
CCAIR, INC.
Incorporated under the laws of Delaware 56-1428192
(I.R.S. Employer ID No.)
P. O. BOX 19929
CHARLOTTE, NORTH CAROLINA 28219-0929
(704) 359-8990
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 1998
----- ---------------------------
Common stock, $0.01 par value 8,415,695
<PAGE>
CCAIR, INC.
FORM 10-Q QUARTERLY REPORT FOR
FISCAL QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION:
ITEM 1. Financial Statements: 3
Condensed Balance Sheets as of
June 30, 1998 and December 31, 1997. 3
Condensed Statements of Income for
the Three Months and Six Months
ended June 30, 1998 and 1997. 4
Condensed Statements of Cash Flows
for the Six Months ended June 30,
1998 and 1997. 5
Notes to Condensed Financial Statements. 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. 8
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II - OTHER INFORMATION:
ITEM 1. Legal Proceedings. 12
ITEM 2. Changes in Securities. 12
ITEM 3. Defaults Upon Senior Securities. 12
ITEM 4. Submission of Matters to a Vote
of Security Holders. 12
ITEM 5. Other Information. 13
ITEM 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 15
EXHIBIT INDEX E-1
</TABLE>
2
<PAGE>
CCAIR, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(Unaudited)
-----------
JUNE 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,450 $ 11,647
Receivables, net 5,783,193 5,047,701
Inventories, less allowance for
obsolescence of $466,000 815,864 509,586
Parts held for resale, net of
valuation reserves of $700,000 1,071,737 1,205,277
Prepaid expenses and deposits 2,109,917 1,976,896
----------- -----------
Total current assets 9,786,161 8,751,107
----------- -----------
PROPERTY AND EQUIPMENT:
Flight equipment and leasehold improvements 6,104,536 5,525,291
Ground and other property and equipment 4,412,311 4,380,712
----------- ------------
10,516,847 9,906,003
Less accumulated depreciation
and amortization ( 6,916,554) ( 6,552,430)
----------- -----------
3,600,293 3,353,573
----------- -----------
OTHER ASSETS 24,630 35,522
----------- -----------
Total assets $13,411,084 $12,140,202
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 2,446,713 $ 2,490,334
Note payable expected to be refinanced 7,920,000 7,920,000
Short-term borrowings 750,000 900,000
Current obligations under capital leases 159,246 229,194
Accounts payable 6,099,995 8,129,043
Accrued overhaul expenses 1,959,083 883,639
Accrued expenses 5,075,486 5,099,252
----------- -----------
Total current liabilities 24,410,523 25,651,462
Long-term debt, less current maturities 252,270 373,147
Capital lease obligations, less
current obligations 2,101,788 2,269,230
----------- -----------
Total liabilities 26,764,581 28,293,839
----------- -----------
Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value, 30,000,000
shares authorized, 8,415,695 and
8,335,695 issued and outstanding at
June 30, 1998 and December 31, 1997 84,156 83,357
Additional paid-in-capital 19,655,760 19,508,276
Accumulated deficit (33,093,413) (35,745,270)
----------- -----------
Total shareholders' deficit (13,353,497) (16,153,637)
----------- -----------
Total liabilities and
shareholders' deficit $13,411,084 $12,140,202
=========== ===========
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
CCAIR, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $17,847,978 $17,697,032 $32,182,324 $33,540,405
Other 245,170 313,040 474,285 954,042
----------- ----------- ----------- -----------
Total 18,093,148 18,010,072 32,656,609 34,494,447
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Flight operations 4,763,404 6,213,341 9,285,298 11,866,634
Fuel and oil 1,144,189 1,600,606 2,264,642 3,311,743
Maintenance 3,465,655 3,386,009 6,213,774 6,575,261
Ground operations 2,418,069 2,357,963 4,540,399 4,176,999
Advertising, promotions
and commissions 2,591,122 2,851,322 4,557,176 5,028,188
General and administration 1,063,273 994,415 2,219,937 2,148,001
Depreciation and amortization 225,089 359,809 419,710 777,912
----------- ----------- ----------- -----------
Total 15,670,801 17,763,465 29,500,936 33,884,738
----------- ----------- ----------- -----------
OPERATING INCOME 2,422,347 246,607 3,155,673 609,709
Interest expense ( 318,165) ( 97,707) ( 532,848) ( 335,861)
Other income (expense), net ( 859) 10,331 29,033 11,528
----------- ----------- ----------- -----------
Income before income taxes 2,103,323 159,231 2,651,858 285,376
Provision for income taxes --- ( 140,928) --- ( 140,928)
----------- ----------- ----------- -----------
Net income $ 2,103,323 $ 18,303 $ 2,651,858 $ 144,448
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ .25 $ .00 $ .32 $ .02
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,376,574 7,740,654 8,361,220 7,740,654
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ .23 $ .00 $ .29 $ .02
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,087,983 8,075,459 9,021,155 8,097,846
=========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
CCAIR, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
------------ --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,651,858 $ 144,448
Adjustments to reconcile net income to
net cash provided by operating activities:
Note discount amortization 36,000 23,432
Depreciation and amortization1 419,710 2,829,445
Loss (gain) on disposal of assets ( 29,033) 1,627
Lease expense less than payments ---- ( 255,706)
Changes in certain assets and liabilities:
Accounts receivable ( 735,492) ( 571,024)
Inventories ( 306,278) ( 133,125)
Parts held for resale 133,540 ----
Accounts payable (2,029,048) 450,689
Accrued expenses 1,051,678 1,927,046
Prepaid expenses and deposits ( 133,021) 657,224
Other changes, net 10,894 21,710
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,070,808 5,095,766
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 672,384) (3,849,048)
Proceeds from sale of assets 34,985 1,000
----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES ( 637,399) (3,848,048)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 148,283 ----
Issuance of notes and long-term debt 362,067 463,434
Short-term borrowings, net ( 150,000) 3,664,800
Reductions of notes and long-term debt ( 799,956) ( 480,364)
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES ( 439,606) 3,647,070
----------- -----------
Net increase (decrease) in cash ( 6,197) 4,894,788
Cash, beginning of period 11,647 9,990
----------- -----------
CASH, END OF PERIOD $ 5,450 $ 4,904,778
=========== ===========
</TABLE>
1 Amortization of capitalized overhauls is included herein and in
maintenance, materials and repairs expense in the accompanying
Condensed Statements of Income for the six months ended June 30, 1997.
See notes to condensed financial statements.
5
<PAGE>
CCAIR, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
1. BASIS OF PRESENTATION:
The condensed financial statements included herein have been prepared
by CCAIR, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. These
condensed financial statements reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of results
for the interim period. These adjustments consist solely of normal
recurring adjustments. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's transition
report on Form 10-K for the six-months ended December 31, 1997.
2. EARNINGS PER COMMON SHARE:
In February, 1997 the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting EPS.
It requires presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires reconciliation of the computation of basic EPS and diluted
EPS. Basic EPS is computed by dividing income available to shareholders
by the weighted average number of shares outstanding for the period.
Diluted EPS gives effect to all dilutive potential common shares that
were outstanding during the period. Prior period EPS has been restated
to conform to the new statement.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD THREE-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
--------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Net income $ 2,103,323 8,376,574 $ .25 $ 18,303 7,740,654 $ 0.00
Effect of dilutive securities
(options and warrants) 711,409 334,805
--------- ---------
Diluted earnings per share
Net income $ 2,103,323 9,087,983 $ .23 $ 18,303 8,075,459 $ 0.00
========= =========
Pro forma effect of retroactive
application of change in
accounting principle
Net loss $(127,921) 7,740,654 $(0.02)
SIX-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
--------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- -------------------------------------
Basic earnings per share
Net income $ 2,651,858 8,361,220 $ .32 $ 144,448 7,740,654 $ .02
Effect of dilutive securities
(options and warrants) 659,935 357,192
--------- ---------
Diluted earnings per share
Net income $ 2,651,858 9,021,155 $ .29 $ 144,448 8,097,846 $ .02
========= =========
Pro forma effect of retroactive
application of change in
accounting principle
Net loss $(165,133) 7,740,654 $(0.02)
</TABLE>
6
<PAGE>
3. COMMITMENTS AND CONTINGENCIES:
The Company is subject to the regulatory authority, among others, of
the Federal Aviation Administration and the Department of
Transportation. These agencies require compliance with their standards
and conduct safety and compliance audits. Violations, if any, of these
regulations subject the Company to fines or sanctions. The Company is
also subject to other claims arising in the ordinary course of
business. In the opinion of management, the outcome of these matters
would not have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
The Company has been engaged with representatives of and counsel for
Her Majesty the Queen in Right of Canada as Represented by the Ministry
of Industry, Science and Technology (the "Ministry") in discussions and
negotiations regarding the reimbursement obligation, if any, of the
Company to the Ministry arising from the change in lessor for the four
(4) de Havilland DHC 8-102 aircraft (the "Aircraft") leased by the
Company. The Ministry has informed the Company that the new lessor, CIT
Group/Capital Equipment Financing, Inc. ("CIT") made a claim under
certain economic development insurance provided by the Ministry to the
former lessor, Mellon Financial Services Corporation #3 ("Mellon"),
when the Company entered into new lease agreements with CIT for the
Aircraft in December of 1994. The Ministry asserts that it has a right
to reimbursement in the amount of $16,996,995 but has proposed that the
Company agree to pay $6,000,000 secured by a pledge of an undetermined
number of shares of the Company's common stock.
The Company does not have an agreement with the Ministry regarding the
economic development insurance and has not acknowledged any obligation
to reimburse the Ministry for claims paid under the original leases at
the same time that the Company entered into new leases with CIT. The
Company has made certain proposals for future consideration to resolve
the Ministry's claim and is continuing negotiations with the Ministry.
Company management, a former member of the Board of Directors and
outside counsel have been involved in discussions of issues with the
Ministry. In March, 1998 the Company and the Ministry discussed
utilizing various dispute resolution mechanisms, including mediation,
arbitration or third party review. It is uncertain whether the Company
and the Ministry will reach an agreement. Based on information
presently available to management, the ultimate outcome of this matter
will not have a material impact on the financial condition, results of
operations or cash flows of the Company.
In June, 1995 the Company entered into a sale leaseback agreement with
a related party partnership (the "Partnership") for certain engines
owned by the Company. These leases were operating in nature, and did
not provide for a purchase option at the end of the first lease term.
This lease expired on June 30, 1998. To induce this transaction, the
Partnership received 250,000 warrants to purchase Company common stock,
immediately exercisable, and originally expiring on the last day of the
first lease term. Under provisions of the lease, the Company is
required to return the engines to the lessor in freshly overhauled
condition, or with a cash payment in lieu of, based upon a stipulated
calculation. The Company has approached the lessor with alternative
return conditions which are being contemplated. The alternatives
include a lump sum cash payment to the Partnership and the extension of
its warrants to purchase stock; or issuance of shares of stock to the
Partnership as compensation for the end of lease conditions. In the
latter two cases, the Company proposes that it receive title to the
engines, at which time they may be sold to offset expenses related to
the lease expiration. The Company and the Partnership have not yet
reached a determination as to which option may be implemented. The
Company has established an accrual for the anticipated expenses in the
amount of $515,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company recorded net income of $2,103,323 ($.25 per share) in the
quarter ended June 30, 1998, an increase of $2,085,000 over the comparative
quarter in 1997. While the Company's action to restructure its aircraft fleet
reduced its available seat miles (ASMs") by 12.3% for the three months ended
June 30, 1998 as compared to June 30, 1997, the ASMs have increased 19.5% from
the quarter ended March 31, 1998. The capacity increase in the second quarter
was realized through the addition of two Dash 8 aircraft, one added in April and
the other in May, as well as increased utilization of its Jetstream Super 31
fleet. The 20 Jetstreams were not fully integrated in the Company's flight
schedule until May, 1998. The Dash 8 aircraft added in the second quarter are
operated under leases which expire in December, 2000. The Company's operating
results continue to benefit from reductions in fuel, flight operations, and
certain maintenance expenses. Fuel prices remain relatively low at an average
cost of $.61 per gallon in the current quarter, as compared to $.82 in the same
period in 1997, for a reduction of 25.6%. Also contributing to the overall
decrease in variable expenses, including fuel, is the decrease in capacity.
RESULTS OF OPERATIONS
The following table sets forth selected operating comparisons for the
three-month and six-month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
AIRLINE OPERATING STATISTICS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- ----------------------------------
% %
1998 1997 Change 1998 1997 Change
----------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $18,093,148 $18,010,072 .5 $32,656,609 $34,494,447 ( 5.3)
Operating expense $15,670,801 $17,763,465 (11.8) $29,500,936 $33,884,738 (12.9)
Revenue passengers carried 218,415 210,535 3.7 381,210 382,651 ( .4)
Revenue passenger miles (1) 39,488,338 38,630,040 2.2 68,904,482 70,499,614 ( 2.3)
Available seat miles (2) 64,973,465 74,076,454 (12.3) 119,341,547 144,695,992 (17.5)
Passenger load factor (3) 60.8% 52.1% 16.7 57.7% 48.7% 18.5
Passenger breakeven load factor 53.6% 51.7% 3.7 53.0% 48.3% 9.7
Yield per revenue passenger
mile (4) 45.2(cents) 45.8(cents)( 1.3) 46.7(cents) 47.6(cents)( 1.9)
Passenger revenue per available
seat mile 27.5(cents) 23.9(cents) 15.1 27.0(cents) 23.2(cents) 16.4
Operating cost per available
seat mile 24.1(cents) 24.0(cents) .4 24.7(cents) 23.4(cents) .6
Average passenger trip (miles) 180.8 183.5 ( 1.5) 180.8 184.2 ( 1.8)
Average passenger fare $81.71 $84.06 ( 2.8) $84.42 $87.65 ( 3.7)
Completion factor 97.9% 96.0% 2.0 97.1% 95.2% 2.0
</TABLE>
(1) One revenue passenger transported one mile.
(2) The product of the number of aircraft miles and the number of available
seats on each stage, representing the total passenger capacity offered.
(3) The ratio of revenue passenger miles to available seat miles,
representing the percentage of seats occupied by revenue passengers.
(4) The passenger revenue per revenue passenger mile.
FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
The Company has taken delivery of and is operating all 20 of its
replacement Jetstream Super 31 aircraft. The retirement of its aging aircraft
fleet (the Short Brothers S-360 and the British Aerospace Jetstream 31) and the
implementation of a newer aircraft as well as the two additional Dash 8 aircraft
has resulted in improved operational performance. The Company's completion
factor for the three months ended June 30, 1998 was 97.9%, as compared to 96.0%
for the quarter ended June 30, 1997.
Operating revenues increased $83,000, or .5% for the quarter ended June
30, 1998 versus June 30, 1997. The increase is attributable to the increased
load factor, which increased 16.7% from 52.1% to 60.8% in the comparative
quarters ended June 30, 1997 and 1998, respectively. While the restructuring
plan resulted in a decrease in ASMs in the current quarter versus the same
period in 1997, the stable revenues allowed the Company to attain an increase in
revenue per ASM of 15.1%, or 3.6(cent). Additionally, the Company carried
218,415 revenue passengers in the current quarter, as compared to 210,535 in the
quarter ended June 30, 1997, an increase of 3.7%. Contributing to the increase
in revenue passengers were newly implemented routes from Raleigh, North Carolina
to Myrtle Beach, South Carolina and Roanoke and Richmond, Virginia in May 1998;
and from Raleigh to Savannah, Georgia and Washington, D.C. (Dulles) in June,
1998. The yield remained relatively stable, at 45.2(cent), as compared to
45.8(cent) in the quarter ended June 30, 1997, a decrease of 1.3%. The average
passenger fare declined $2.35, or 2.8%, for the quarter ended June 30, 1998 as
compared to the quarter ended June 30, 1997 as a result of the reduced average
passenger trip and yield reduction.
8
<PAGE>
Appreciable operational efficiencies were achieved through the
Company's recent fleet restructuring activities; while these efficiencies
resulted in reductions in variable operating costs, the operating cost per ASM
remained relatively stable at 24.1(cent) in the quarter ended June 30, 1998
versus 24.0(cent) in the same quarter of 1997. In the comparative quarters,
total operating expenses decreased 11.8% with a decrease in ASMs of 12.3%,
resulting in little variance in the operating cost per ASM. The following table
compares components of operating cost per ASM for the three months ended June
30, 1998 and 1997:
COST PER ASM -
QUARTER ENDED
JUNE 30,
(IN CENTS)
-----------------------
1998 1997
----- -----
Flight operations 7.4 8.5
Fuel and oil 1.8 2.2
Maintenance 5.4 4.7
Ground operations 3.8 3.3
Advertising, promotions, commissions 4.0 3.9
General and administration 1.6 1.3
Depreciation and amortization .1 .1
----- -----
24.1 24.0
==== ====
The fleet restructuring plan yielded significant decreases in flight
operations expenses of 1.1(cent) per ASM, primarily in the areas of aircraft
rental expense and flight crew training. The decrease in flight operations
expense on a per unit basis was due to reduced aircraft lease expense and
reduced hull insurance expense. Maintenance and general and administrative
expenses increased on a per ASM basis, and were directly related to the
reduction in total seat capacity through the replacement of Shorts with the
Jetstream aircraft on many of the Company's routes. Ground operations expense
increased 0.5(cent) as a result of increases in customer service employee
salaries and wages, as well as additions to customer service staffing levels
initiated to remain in accordance with US Airways' commitment to higher levels
of passenger service. An increase in fees charged to the Company resulted in
elevated advertising, promotions and commissions expense of 0.1(cent). Fuel
prices as compared to the prior year remain low, and resulted in a decrease of
0.4(cent) per ASM; additionally, the Company's usage levels have decreased from
1,961,361 gallons (at an average cost of $.82 per gallon) in the quarter ended
June 30, 1997 to 1,833,879 gallons (at an average cost of $.61 per gallon)in the
current quarter.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
The Company recorded net income of $2,651,858 ($0.32 per share) for the
six months ended June 30, 1998 as compared to net income of $144,448 ($0.02 per
share) for the same period in 1997. While operating revenue decreased
$1,837,838, from $34,494,447 to $32,656,609, the Company achieved offsetting
reductions in operating expenses of $4,383,802, from $33,884,738 to $29,500,936.
The resulting increase in income from operations is primarily due to the
restructuring plan implemented by the Company in the 1997 Transition Period
ended December 31, 1997.
The operating cost per ASM increased 1.3(cent), or 5.5% as a result of
a decrease in ASMs of 17.5% in conjunction with a 12.9% decrease in operating
costs for the six-month period ended June 30, 1998. Reductions in fuel prices
and efficiencies achieved through the restructuring plan resulted in significant
reductions in fuel, flight operations and maintenance expenses, which were only
partially offset by increases in ground operations expense and passenger
handling and ticketing fees charged to the Company.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The cash position and cash flows of the Company continue to be
critical issues as of June 30, 1998. The Company utilized borrowing under two
revolving lines of credit and short-term loans to satisfy its operating cash
requirements during the period ended June 30, 1998. The key elements to improved
operating results are the level of yield per RPM and passenger load factors. For
the quarter ended June 30, 1998, the yield per RPM remained relatively stable as
compared to the prior year quarter. However, the yield could be affected by fare
discounting beyond the control of the Company. The load factor increased 16.7%
and revenue passengers carried increased 3.7%.
The Company maintains a line of credit with British Aerospace Asset
Management ("BAAM") to provide for more even cash flows between ACH settlements.
As of June 30, 1998 the Company had repaid all obligations under this line. The
maximum outstanding balance on this line during the three months ended June 30,
1998 was $4 million, with interest charged at an average rate of 10.5%.
If operating cash flows and the Company's line of credit are
insufficient to meet obligations, it may obtain financing through short-term
loans from officers and directors, extension of terms with trade creditors, or
issuance of Company stock. Currently, the Company intends to issue common stock
to satisfy short-term obligations to Lynrise coming due on August 31, 1998, in
the amount of $1,675,000 (see discussion under "Restructuring"). If the Company
issues stock to satisfy this and certain other obligations, such transactions
will increase the number of shares of the Company's common stock that are held
for sale and may adversely affect the market price and the liquidity of the
Company's common stock.
Shares of the Company's common stock are traded on the Nasdaq SmallCap
Market ("Nasdaq"). As of December 31, 1997 the Company did not meet certain
requirements to maintain its listing on Nasdaq. The Company has submitted a
request to Nasdaq for exception to certain of the maintenance criteria. No
adverse action has been taken by Nasdaq and the Company does not anticipate that
adverse action will betaken. Beginning on July 7, 1998, the Company did meet the
market capitalization requirement to maintain its listing, and has maintained
such requirement through the date of this filing. Should the Company not be able
to maintain the criteria for continued listing, and adverse action is taken by
Nasdaq, and the Company is unable to obtain listing on another market, the
Company and its shareholders may be adversely affected.
The Company's balance sheet reflects a deficit in working capital,
defined as current assets less current liabilities, of approximately $14,624,000
on June 30, 1998, as compared to $16,900,000 on December 31, 1997. Working
capital is affected by both a $9.6 million short-term note issued in conjunction
with lease termination agreements and seasonality of operations. The Company
intends to exercise its option to convert $7.9 million of the short-term note to
a long-term obligation prior to August 31, 1998. The payment of $1.7 million
necessary to exercise the option and satisfy the remaining portion of the
short-term obligation will be generated through internal operations or by the
issuance of stock, or a combination of these methods.
Cash generated from operating activities was $1,071,000 for the six
months ended June 30, 1998. The primary sources of cash were net income,
depreciation, and the increase in accrued expenses, for a total of $4,123,000.
The major uses of cash were increases in accounts receivable and inventories and
the reduction of accounts payable, aggregating to $3,071,000.
The Company's capital expenditures totaled $672,000, comprised
primarily of purchases of major spare parts assemblies and leasehold
improvements. Capital expenditures planned for the remainder of the year consist
of purchases of major spare parts assemblies, leasehold improvements and fixed
asset replacement. Effective July 1, 1997, the Company began accounting for
major component overhauls using the accrual method, as opposed to the deferral
method practiced in prior years. The change in accounting method, while causing
a change in the way overhaul expenditures are characterized, does not relieve
the Company of the cash expenditures related to the performance of major
component overhauls. Accordingly, expenditures for overhauls in the current year
are not included in planned capital expenditures. The Company made scheduled
debt payments of $800,000 in the six-month period ended June 30, 1998.
10
<PAGE>
RESTRUCTURING
On September 11, 1997 the Company entered into a transaction with
Lynrise Air Lease, Inc. ("Lynrise") to return the Company's nine leased Shorts
aircraft to Lynrise as lessor. The aircraft leases were scheduled to continue
through September, 2004, at a monthly rate of $34,000 per aircraft. These
aircraft did not meet US Airways criteria of cabin service, as they are
unpressurized and slow. In addition, the lease expense per block hour was high,
and the operating expenses continued to escalate. The aircraft were returned
between November, 1997 and January, 1998. In return for this early termination
of the aircraft leases, the Company issued a promissory note in the amount of
$9,725,000. The promissory note was issued in contemplation of the Company's
obligations to the lessor: lease termination and aircraft remarketing provisions
- - $6.1 million, previously recorded liabilities in the form of accrued rent and
notes payable - $1.8 million and return condition obligations - $1.8 million.
This note is due on August 31, 1998.
Before August 31, 1998, the Company intends to exercise its option
issued in conjunction with the note, whereby it would pay Lynrise $1,675,000 in
cash or stock or a combination of the two. Upon the option's exercise, the
remainder of the note, $7,920,000, would be converted to a subordinated note,
which is convertible to common stock at $7.50 per share. This subordinated note
would be due in 2004, with interest and principal payments to begin in 1999.
Principal payments may be paid in cash or stock, at the Company's option.
Under an accord reached with an aircraft lessor in November, 1997 the
Company agreed to replace its 14 Jetstream 31 aircraft with 20 Jetstream Super
31 aircraft. In return for renegotiated lease rates, the Company agreed to lease
14 of the Jetstream Super 31 aircraft for seven years, and the additional six
Jetstream Super 31 aircraft until December 31, 1998. The final Jetstream Super
31 aircraft was operational in the Company's system prior to April 30, 1998. The
Jetstream Super 31 aircraft are newer and faster than the predecessor
Jetstreams, and can operate with fewer weight restrictions. The return of the
Jetstream 31 aircraft to the lessor is expected to be completed in the third
quarter of 1998.
The Company estimates that the return condition specifications on these
aircraft will cost approximately $50,000 per aircraft. These costs were provided
for as restructuring charges in the period ended December 31, 1997. As a result
of the retirement of two aircraft types, the Company wrote down its spare parts
inventory to net realizable value at December 31, 1997. The writedowns consisted
of $1.2 million in Shorts parts; $100,000 in Jetstream parts; $100,000 in
ancillary parts required to maintain both fleets; and a valuation reserve
increase of $700,000 in contemplation of uncertainties in the resale market. The
Company anticipates aggressively marketing its excess spares. The net book value
of parts held for resale was $1,072,000 on June 30, 1998. Additionally, the
Company wrote off $680,000 in unamortized leasehold improvements related to
these two aircraft types in the period ended December 31, 1997.
As a result of the restructuring plans undertaken to accomplish fleet
simplification and cost reductions, the Company estimates total annual expense
reductions in excess of $4 million per year, commencing in 1998. These savings
will result principally from the reduction in aircraft rentals, maintenance
expense, flight crew and other labor costs, landing fees and spare parts
inventory levels. In addition, the fleet simplification should improve the
Company's ability to achieve higher levels of reliability, resulting in fewer
flight cancellations and delays and increased revenues. The Company does not
anticipate any additional restructuring charges at this time.
OTHER
CHANGE IN ACCOUNTING PRINCIPLE
Effective July 1, 1997 the Company elected to change its method of
accounting for engine, propeller and landing gear overhauls from the deferral
method to the accrual method. Under the method previously utilized, the Company
capitalized these expenditures and amortized them over the estimated service
life of the overhaul. The change in accounting principle results in accrual for
future expenditures for overhauls based on fight hours incurred each month, at a
rate commensurate with the future expected cost of overhaul. Implementation of
the change in principle necessitated the write-off of previously capitalized
items, along with the related accumulated amortization, as of July 1, 1997. The
Company believes the newly implemented accounting principle more closely
emulates its lease agreements and contracts for repair and maintenance of these
components.
11
<PAGE>
YEAR 2000 COMPLIANCE
The Company has evaluated its information infrastructure for Year 2000
compliance. The Company's financial and statistical reporting and its crew
scheduling systems are in the process of being updated, with completion of the
process expected in early 1999. Any costs associated with these modifications
will be expensed as incurred. The Company depends upon passenger reservations
and operational control systems maintained by other companies, vendors and
government entities. In the event that any of these systems are not Year 2000
compliant, the Company's operations could be adversely affected.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q reflect
projections or expectations of future financial or economic performance of the
Company and are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties that may cause future results to differ materially from those set
forth in such statements. The Company is not obligated to update forward-looking
statements to reflect events or circumstances after the date of this report.
No assurance can be given that actual results or events will not differ
materially from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences include: the Company's relationship with US Airways; general
economic conditions in the Company's markets; price competition in the airline
industry; increases in the costs for fuel and maintenance; new governmental
regulations concerning aircraft or air transportation; operating results for US
Airways; and other factors discussed in the Company's filings with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None to report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGES IN SECURITIES
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Due to the change in fiscal year end, the Company held an
annual meeting of shareholders on June 25, 1998 in Charlotte, North Carolina. Of
the 8,365,695 shares of Common Stock outstanding on the record date, 7,171,694
were present by proxy. Those shares were voted on the matters before the meeting
as follows:
12
<PAGE>
A. Election of Directors.
<TABLE>
<CAPTION>
Name of Director No. Votes For: No. Votes Withheld:
---------------- -------------- -------------------
<S> <C> <C>
Kenneth W. Gann 7,140,919 30,775
Dean E. Painter, Jr. 7,140,919 30,775
K. Ray Allen 7,094,719 76,975
Gordon Linkon 7,092,699 78,995
George Murnane, III 7,094,719 76,975
Eric W. Montgomery 7,094,719 76,975
</TABLE>
B. Other Matters.
<TABLE>
<CAPTION>
Broker
For: Against: Abstain: Non-Votes:
---- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1. Proposal to amend Restated 6,934,634 217,810 19,250 0
Certificate of Incorporation to
increase number of authorized
shares
2. Proposal to amend Restated 1,542,223 1,015,194 42,941 5,765,337
Certificate of Incorporation to
eliminate power of shareholders
to take action without meeting
3. Proposal to approve 1998 1,446,757 1,013,519 32,345 5,873,074
Stock Incentive Plan
4. Proposal to ratify selection 7,131,199 29,045 11,450 0
of Arthur Andersen, LLP as
independent auditors for fiscal
year ending December 31, 1998
</TABLE>
ITEM 5. OTHER INFORMATION
The Company anticipates that its next annual meeting will be
held on or about May 15, 1999. Stockholders desiring to
submit proposals for inclusion in the Company's proxy
statement and form of proxy will be required to submit them
to the Company on or before November 16, 1998. To be included,
the proposal must be made by an eligible stockholder and
must be proper in form and in substance, as prescribed by the
Securities Exchange Act of 1934, as amended, and the rules and
regulations adopted thereunder. Stockholders desiring to
submit proposals for consideration at the annual meeting,
but not for inclusion in the Company's proxy statement and
form of proxy, will be required to notify the Company on or
before February 9, 1999. In accordance with the Company's
Bylaws, the notice shall provide a brief description of each
proposal and the reasons for conducting such business at the
annual meeting, the name and address of the record holder of
the stockholder's shares of Common Stock, the number of shares
of Common Stock beneficially owned by the stockholder, and a
description of any material interest of the stockholder in the
business to be considered.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
4 Specimen Common Stock Certificate. (1)
</TABLE>
(b) Reports on Form 8-K
None to report.
- ----------------------
(1) Incorporated by reference to Registration Statement on Form S-1,
File No. 33-28967.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
July 17, 1998
CCAIR, INC.
By: /s/ Kenneth W. Gann By: /s/ Eric W. Montgomery
--------------------------------- -------------------------
Kenneth W. Gann, President and Eric W. Montgomery
Chief Executive Officer Vice President - Finance
(Principal Executive Officer) (Principal Financial Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT FILED SEQUENTIAL
NO. EXHIBIT HEREWITH AT PAGE NO.
--- ------- ----------- --------
<S> <C> <C> <C>
3.1 Amended and Restated Certificate
of Incorporation
4 Specimen Common Stock
Certificate. (1)
</TABLE>
- ---------------------
(1) Incorporated by reference to Registration Statement on Form S-1,
File No. 33-28967.
E-1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CCAIR, INC.
CCAIR, Inc., a corporation organized and existing under the laws of the
General Corporation Law of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is CCAIR, Inc. (the "Corporation"). The
Corporation was originally incorporated under the name Carolina Sunbird
Airlines, Inc., and the original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on July 16, 1984,
and has been subsequently amended from time to time (the original Certificate of
Incorporation and all amendments thereto are hereby collectively referred to as
the "Certificate of Incorporation").
2. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation.
3. This Amended and Restated Certificate of Incorporation set forth
below was approved by the Corporation's Board of Directors and stockholders and
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the Delaware General Corporation Law, the stockholders of the Corporation having
approved the Amendment to Article Fourth at a meeting of stockholders duly held
on June 25, 1998 at which a quorum was present.
4. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
First. The name of the Corporation is CCAIR, Inc.
Second. The address of its registered office in the State of
Delaware is Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of
the registered agent at such address is the
Corporation Trust Company.
Third. The nature of the business or purposes to be
conducted or promoted is to engage in any lawful act
or activity for which corporations may be organized
under the General Corporate Law of Delaware.
Fourth. The total number of shares which the Corporation has
authority to issue is Thirty Million (30,000,000)
shares of Common Stock, par value of One Cent ($0.01)
per share, with each stockholder of the Corporation
entitled
<PAGE>
to one (1) vote for each share of Common Stock held
by such stockholder.
Fifth. The board of directors is authorized to make, alter
or repeal the Bylaws of the Corporation. Election of
directors need not be by written ballot.
Sixth. The name and mailing address of the incorporator is:
L. M. Curtis
100 West Tenth Street
Wilmington, Delaware 19801
Seventh. No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages
for breach of his or her fiduciary duty as a
director, provided that nothing contained in this
Article 8 shall eliminate or limit the liability of a
director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which
involves intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the
General Corporation Law of the State of Delaware or
(iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or
modification of the foregoing provisions of this
article by the stockholders of the Corporation shall
not adversely affect any right or protection of a
director of the Corporation existing at the time of
such repeal or modification.
IT WITNESS WHEREOF, said CCAIR, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by Kenneth W. Gann, its
President, and Eric W. Montgomery, its Secretary, this 29th day of June, 1998.
CCAIR, INC.
Attest: By: /s/ Kenneth W. Gann
------------------------------
Title: President
------------------------------
/s/ Eric W. Montgomery
- ----------------------------
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from CCAIR, Inc.
condensed financial statements for the fiscal quarter ended June 30, 1998 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C> <C>
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<PERIOD-TYPE> 3-MOS 6-MOS
<CASH> 5,450 5,450
<SECURITIES> 0 0
<RECEIVABLES> 5,783,193 5,783,193
<ALLOWANCES> 0 0
<INVENTORY> 1,887,601 1,887,601
<CURRENT-ASSETS> 9,786,161 9,786,161
<PP&E> 10,516,847 10,516,847
<DEPRECIATION> (6,916,554) (6,916,554)
<TOTAL-ASSETS> 13,411,084 13,411,084
<CURRENT-LIABILITIES> 24,410,523 24,410,523
<BONDS> 0 0
<COMMON> 84,156 84,156
0 0
0 0
<OTHER-SE> (13,353,497) (13,353,497)
<TOTAL-LIABILITY-AND-EQUITY> 13,411,084 13,411,084
<SALES> 0 0
<TOTAL-REVENUES> 18,093,148 32,656,609
<CGS> 0 0
<TOTAL-COSTS> 15,670,801 29,500,936
<OTHER-EXPENSES> 859 (29,033)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 318,165 532,848
<INCOME-PRETAX> 2,103,323 2,651,858
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,103,323 2,651,858
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,103,323 2,651,858
<EPS-PRIMARY> 0.25 0.32
<EPS-DILUTED> 0.23 0.29
</TABLE>
